Insurance M&A and financing Q1 2021
This blog considers insurance M&A and financing trends over the past 12 months.
A market overview
In past months I've been asked to join various sessions to discuss experiences and trends in the market. As we near the end of Q1 2021, 12 months or so after Covid-19 really impacted so many in the UK, I have decided to share some personal reflections on the ups and downs of the deals market these past 12 months, and comment on its current features.
No-one will be surprised that transactions across the City took a dip in the early part of last year, but activity levels in different sectors continued to be strong – we saw over 20 projects in the insurance market alone last year
This was especially the case in with lower-mid market intermediary deals. The continuation surprised many, especially given the prevalence of private equity money involved, but the deals we were seeing involved real experts in the market who continued to see the business rationale in closing those transactions. They were also at a price point that continued to be manageable, despite the uncertainty and more challenging financing environment. A number were bolt-ons that were an important prelude to group sales that occurred later in the year/early this year.
The market also saw a number of significant start-ups and scale-ups. We were thrilled to work on the Beat Capital/Bain Capital Credit strategic partnership announced in the Autumn, and the Mosaic Syndicate start-up announced last month (backed by Golden Gate Capital).
There were of course a number of high profile processes that were in the market but which didn't close last year. And there were others that were put on hold earlier in the year but which came back as sentiment and market conditions improved.
Looking back, there was certainly a period of much uncertainty, with balance sheet exposures being very difficult to assess. Diligence levels on intermediary deals also increased, with focus on underlying and sustainable earnings.
The legacy sector saw a number of successful investments by private equity funds, which underscored the attractiveness of legacy as a class. The increasing attention being paid by live businesses to capital optimisation should lead to a continued run of legacy transactions for some time. This past year we have seen a range of projects, including traditional RITCs, LPTs and Part VIIs, and if the start of 2021 is anything to go by, there will be a good number of such deals this year also.
Deal terms and dynamics - a snapshot of recent and current trends
Diligence and decision making
The resilience of target businesses (and indeed the resilience of their customers), quality of earnings, and their ability to meet financial covenants is always a feature of deals, but especially so this past twelve months.
We saw more commercial diligence being undertaken, quite some way down the value chain, seeking as best one ever can to minimise risks in this area. From a legal perspective, working closely with other advisers undertaking commercial and financial due diligence has never been more important.
Some deals have been taking longer with regulators under huge pressure, including from an operational perspective. We are generally advising clients to assume that the full time period allowed to a regulator will be taken.
That said, on some recent deals, the regulatory approvals have come through very quickly – sometimes within days!
Deal terms always shift where purchasers are particularly cautious and financing market conditions are less favourable. This past year has seen the introduction of deal techniques such as material adverse change clauses, price adjustment mechanisms to compensate for poor trading, and holdbacks, in much lower value deals than used often to be the case.
Early in the pandemic, some of the deal terms being asked for were a little 'silly season' – we saw drafting being sought in material adverse change clauses that might properly be described as giving the buyer an "option"!
As the year progressed, deal terms normalised. In large part that is because the deals coming to market involved strong businesses and were not in any sense fire sales.
As any good deal doer knows, in order to keep deals on track, care and judgment is needed not to push too far in either direction – as absent any requirement to sell as a forced seller, non-stressed deals proceed most smoothly where all parties take a balanced view on contractual terms, values, and future prospects.
A buyer's market?
Was the insurance sector deals market ever a buyer's market last year? We can only comment on our own experience, but with strong businesses involved, and competitive auctions for many, the terms obtainable on the sell side of the deals we were involved with were often strong.
Buyers do continue to look to de-risk however, which makes sense as certain major economies head back into lockdowns, and vaccine rollouts in some countries are ahead of others. So the deal protections and levels of diligence mentioned above are likely to be features of deals for some time to come.